UK Rules for Disclosure of Derivatives

The Financial Services Authority in the United Kingdom has adopted final rules requiring disclosure of options and other equity derivatives.

This has long been a hot issue both in the US and the UK. In both countries, regulators have rules that are supposed to prevent takeover by stealth. When one company or investor or fund owns a sizeable share in another -- ignore the specific threshold amounts just now -- it is supposed to disclose the fact.

But lately the growth of equity derivatives of a sort that (a) may allow for the indirect exercise of power over an issuer yet (b) don't count against the threshold, has raised the specter again of the sort of takeovers by stealth the regulators had belived themselves to have exorcised decades before.

In the US, the question of how to treat such equity derivatives has been addressed only in a very piecemeal fashion. The recent CSX decision spoke to it, and the appeals process might have yielded something more authoritative, but the parties have settled their dispute.

In the UK, though, the FSA has taken the question on more directly. Here's the link.

Don't be confused by the rather modest title of the paper. The new rules cover not just "contracts for difference," but other derivatives with similar effects.